Mutual Fund Basic - Dustin Woodard

To diversify your portfolio, mutual fund is a less risky tool to achieve your financial objective. The well diversified factor of mutual fund lowers the potential investment risk. Here we will give you some basic information about mutual fund and then learn how to pick up mutual fund.

1. What is mutual fund

The idea behind a mutual fund is simple: Many people pool their money in a fund, which invests in various securities. Each investor shares proportionately in the fund's investment returns -- the income (dividends or interest) paid on the securities and any capital gains or losses caused by sales of securities the fund holds.
Every mutual fund has a manager, also called an investment adviser, who directs the fund's investments according to the fund's objective, such as long-term growth, high current income, or stability of principal. Depending on its objective, a fund may invest in stocks, bonds, cash investments, or a combination of these financial assets.

2. Advantages of mutual fund

mutual funds have become popular because they offer 4 advantages:

a. Diversification. A single mutual fund can hold securities from hundreds or even thousands of issuers, far more than most investors could afford on their own. This diversification sharply reduces the risk of a serious loss due to problems in a particular company or industry.

b.Professional management. Few investors have the time or expertise to manage their personal investments every day, to efficiently reinvest interest or dividend income, or to investigate the thousands of securities available in the financial markets. They prefer to rely on a mutual fund's investment adviser. With access to extensive research, market information, and skilled securities traders, the adviser decides which securities to buy and sell for the fund.

c.Liquidity. Shares in a mutual fund can be bought and sold any business day, so investors have easy access to their money. While many individual securities can also be bought and sold readily, others aren't widely traded. In those situations, it could take several days or even longer to build or sell a position.

d.Convenience. Mutual funds offer services that make investing easier. Fund shares can be bought or sold by mail, telephone, or the Internet, so you can easily move your money from one fund to another as your financial needs change. You can even schedule automatic investments into a fund from your bank account, or you can arrange automatic transfers from a fund to your bank account to meet expenses. Most major fund companies offer extensive recordkeeping services to help you track your transactions, complete your tax returns, and follow your funds' performance.

3.Types of mutual funds

Money Market FundsThese funds are a great place to park your money. Whether you're storing money for emergencies, saving for the short-term, or looking for a place to store cash from the sale of an investment, money market funds are a safe place to invest. These funds invest in short-term debt instruments and typically produce interest rates that double what a bank can offer in a checking account or savings account and rival the returns of a CD (Certificate of Deposit).

Bond FundsBond funds carry more risk than money market funds are often used to produce income (useful in retirement) or to help stabilize a portfolio (diversification). The primary types of bond funds are:
Municipal Bond Funds -uses tax-exempt bonds issued by state and local governments (these funds are non-taxable).
Corporate Bond Funds -uses the debt obligations of U.S. corporations.
Mortgage-Backed Securities Funds - uses securities representing residential mortgages.
U.S. Government Bond Funds -uses U.S. treasury or government securities.

Stock FundsStocks funds are considered riskier than bond funds (although certain bond funds can be very risky) and are used for growing your money. Money market funds and bond funds typically provide returns just a percentage or two above inflation, but stock funds should do much better over long periods of time.